Interest Rate Pain Until First Half of Next Year: "Challenge with Undervalued KOSPI Outperforming Stocks"

[Asia Economy Reporter Lee Seon-ae] The securities industry is busy searching for undervalued stocks. Due to employment improvements and high inflation, the schedule for interest rate hikes by the U.S. Federal Reserve (Fed) is expected to accelerate beyond initial forecasts, and the outlook for the magnitude of the hikes is also being revised upward. As a result, advice is emerging to prepare portfolios in anticipation of the interest rate hike cycle starting as early as March.

According to financial information provider FnGuide on the 10th, among listed companies with a market capitalization of over 300 billion KRW, stocks identified by three or more securities firms as having rising net profit growth rates this year and low price-to-earnings ratios (PER) ? indicating undervaluation ? include HMM, Kolon Global, Halla, Halla Holdings, Kumho Construction, BNK Financial Group, DGB Financial Group, JB Financial Group, SeAH Steel, GS, Dongkuk Steel, LX International, and Industrial Bank of Korea. In particular, HMM is expected to see a 20.2% increase in net profit this year, but its PER is only 1.7 times. Kolon Global’s net profit growth is estimated at around 5%, with a PER of 2.7 times.

Lee Kyung-soo, a researcher at Hana Financial Investment, said, "Extremely undervalued stocks can be expected to generate trend-based returns regardless of the direction of interest rates," adding, "Even if predicting interest rate variables is difficult, extremely undervalued stocks can help prepare for volatile market conditions."

In fact, when Hana Financial Investment bought the 20 stocks with the lowest PER at the beginning of the year and sold them on the last trading day over three years, the average return of these 20 stocks was higher than the KOSPI in all three years. The estimated and market capitalization-based low-PER 20-stock group showed a 93.4% performance over three years, while the KOSPI rose 43.9% during the same period. The average return of the extremely undervalued 20 stocks outperformed the KOSPI by an annual average of 16.5 percentage points. The researcher emphasized, "Last year, the excess return of the extremely undervalued stock group over the KOSPI was 39.6 percentage points, the highest, demonstrating the power of these stocks even in a growth-stock-favored environment."

Meritz Securities also stated that in the process of reflecting the slowdown in corporate profit growth in 2022, profitability deterioration amid interest rate hikes, and concerns over liquidity deterioration in the stock market, a portfolio considering ‘upward earnings revisions + strong foreign buying + low PER’ is promising. Kang Bong-joo, a researcher at Meritz Securities, said, "Stocks with rising net profit forecasts compared to one month ago and concentrated foreign demand among undervalued stocks can withstand stock market volatility," adding, "SK Hynix, Kia, KB Financial Group, Hana Financial Group, Samsung Life Insurance, Woori Financial Group, Hyundai Glovis, Samsung Engineering, Samsung Securities, DB HiTek, Hanwha Life Insurance, BNK Financial Group, Hanwha Aerospace, Shinsegae, Hyundai Marine & Fire Insurance, Kolon Industries, Lotte Chilsung, and LX International fit this profile."

Meanwhile, the securities industry expects the interest rate hike cycle to begin in March. Gong Dong-rak, a researcher at Daishin Securities, said, "The U.S. base rate is expected to rise from the current 0.25% (upper bound) to 1.50% or 1.75% by the end of this year, and then increase up to 2.00% or 2.25% by the first half of 2023, with a maximum of eight hikes," adding, "Accordingly, the Korean base rate is expected to be raised two more times this year, with the year-end Korean base rate forecasted at 1.7%."

This content was produced with the assistance of AI translation services.